Opportunities Still Exist Despite Global Turmoil

The turmoil in the world’s financial markets spells trouble for California business owners, particularly those seeking trade in Asia and Latin America.

But the crisis doesn’t spell doom. It is the nature of business to continue during good times and bad--and it is the nature of business owners to solve the problems they face, even those that seem overwhelming.

At the moment, the big job for the California business owner is to find money to grow. You can’t do it on cash flow, as a rule; you need credit to expand, sometimes even to survive. For big leaps in growth, you need equity capital.

As detailed in this space last week, business owners may well find it easier to round up equity capital next year under a new law passed by the Legislature and signed by Gov. Pete Wilson last month.

The law enables people of ample but not extraordinary means to pool money in “capital access funds” to invest in small and mid-sized businesses in California.

If it works as it should, the law will greatly expand the supply of capital available to business owners who now scratch for it. Along the way, it will give people of comfortable means the opportunity to become venture capitalists.

Global Crisis Does Damage Close to Home

That, however, is in the future; under the law, capital access groups can’t start doing business until July 1 at the earliest. Meanwhile, even ordinary bank credit threatens to become scarce, thanks in part to the crisis in the financial markets.

To understand why, it helps to grapple first with the magnitude of the crisis itself. Consider these facts:

* According to Alan Greenspan, chairman of the Federal Reserve Board, the recent slide in the U.S. stock market stripped investors of $1.5 trillion in wealth.

* According to Deutsche Bank, the meltdown in the Asian currency markets destroyed an equal amount of wealth.

Those are big numbers and their impact falls partly on business owners in California.

Why? The disappearance of capital strips businesses in emerging markets of the money they need to grow, just as the destruction of wealth in the U.S. stock market may now make it harder for American businesses to round up capital.

Worse, as capital evaporates, governments in emerging countries devalue their currencies in an effort to cut the prices of exports. In the recent round, governments in Asia and Latin America devalued their currencies by 40% to 70%.

The devaluations compound the problems of foreigners who borrowed dollars to finance their trade earlier in the decade--that is, the very people whose dreams lured the huge flows of capital into their countries in the first place, and whose trade meant so much to California.

For example, if a trading partner in Mexico owes you $1 and the Mexican government devalues the peso by 50%, your trading partner needs twice as many pesos to pay you back. Meanwhile, your partner’s goods fetch only half what they did before the devaluation.

Clearly, two lessons emerge from all this:

* When a foreign government devalues its currency, your trading partner suddenly finds it a whole lot harder to do business with you.

* The worldwide financial crisis is not remote. It does damage close to home.

Business Owners Will Grow and Prosper

And now it threatens to make the hunt for credit difficult even in the United States. Greenspan recently fretted that banks and stock brokerages might tighten the reins on loans to otherwise credit-worthy borrowers. William J. McDonough, president of the New York Federal Reserve Bank, echoed Greenspan’s remarks, worrying that banks and bond market investors might become excessively cautious, perhaps bringing about a liquidity crisis.

Even if these troubles compound the job of finding capital to grow a small or mid-sized business, they cannot threaten business itself. The world will one day find a way to clean up the mess--because it always does. In the meantime, the people who run their own businesses will find ways to solve the problems they face, one by one--because they must.

The root of the English word “crisis” is an ancient Greek verb meaning “to separate” or “to discern.” The Greeks used the word when they saw both peril and opportunity. Two centuries ago, the Rothschilds found opportunity in the peril of the Napoleonic wars, and when peace came, they commanded the strongest financial network in the world.

Americans already have that advantage. The task ahead is to make good use of it.

To that end, until the crisis works itself out, readers of this column will find herein an effort to explore the new rules of the game--an effort to make sense of the many, many ways business owners may round up money to grow and prosper, no matter what the difficulty.

There is opportunity everywhere, even in trouble.

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Columnist Juan Hovey can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.